THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

JOHN KING, CNN ANCHOR: Now let's turn to what's ahead in the next two hours of "State of the Union" as we survey the news, the policies and the politics around the nation and the world on this Sunday, February 1st.

In the United States this week, more than 140,000 workers lost their jobs. Over 6 million currently getting unemployment benefits, and it's possibly could get worse. As we always do when it's time for the bad economic news, we'll get the explanation from CNN chief business correspondent, Ali Velshi.

Another of President Obama's Cabinet picks turns out to have neglected to pay all his taxes. Is former Senator Tom Daschle another special case?

KING: We'll talk about that and much, much more with four of the top political strategists anywhere.

The multi-billion dollar stimulus package was topic one on the Sunday talk shows. Is it a political plan or just a political pinata? The best political team on television will go for all of the truth behind all of the talk. That's all ahead in this hour of STATE OF THE UNION.

First, the economy. With the announcement on Friday that the gross domestic product dropped almost 4 percent last quarter, the largest drop in 26 years, it's hard to imagine how it could get worse. But to tell us exactly how it happened and if it could get worse, I'm joined by CNN chief business correspondent Ali Velshi. Ali, I was out in Middle America this week. The news is bad and bad and worse.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: It really is. I mean, we have not seen these sort of lay-off in a long time. This recession is in its 14th month. Let's go back to when it started, December of '07. That's the unemployment picture for the country. Now the dark colors are the states that are relatively healthy. And you can see back then, 2.7 percent unemployment was the best situation.

The highest, and you want to keep an eye on this number, was 7.4 percent. That was obviously Michigan. We've been seeing auto lay- offs for a long time. But keep an eye on this, we had problems in South Carolina, in Mississippi and you can see here, in Alaska.

Move six months forward to June of 2008. The picture was changing. First of all, the highest unemployment rate in the country had gone from 7.4 percent to 8.5 percent. Still Michigan, I think we can count on the fact that Michigan's going to be in the worst situation, but take a look around the middle of the country. You were seeing job lay-offs in the Southeast and in the Midwest. You still had relative health here in the Mountain West. But California was becoming a bit of a problem.

Now let's move this back forward to December of 2008. This is the latest month for which we've got numbers. Take a look at that, 10.6 percent is now the high end. Once again, it's Michigan. Rhode Island had joined Michigan as one of two states with unemployment above 10 percent. We've got problems here in the Midwest. And the problems in the California have spread to Oregon and Nevada.

Now, the -- you still have this strength here in the Mountain West. But the unemployment rate for the nation is 7.2 percent and you're going to get new unemployment numbers on Friday. Guess where we're expecting those to go? They're only expected to go up and more job losses.

KING: Many think it's going to 9 percent at least before it gets better.

VELSHI: Yes, and the calculations I've run, based on what different economists are saying get us close to 9 percent, maybe not that far, but there are a the of people who are part-time workers in this country that don't get benefits. There are a whole lot of people who have been unemployed for so long, they've fallen off the roll so the real number of people unemployed is much greater than 7.2 percent.

One piece of information we should think about, in this economy, every month a number of people come into the country, they graduate from school, just in order to keep up with the working age population, economists say you need to create 100,000 to 150,000 jobs a month. We lost in December more than 50,000 jobs. We may see that again in January. All of 2008 cost us 2.6 million jobs. So 2.6 million on the downside versus 1.2 to 1.8 on the upside, that's the problem.

KING: Tough math and tough facts from Ali Velshi. Ali, we'll see you a bit later in the program. We'll come back and talk a bit more about this, the cold, hard facts there from Ali Velshi.

Now the political debate here in Washington. Will the Congress and the new president get to do much about it? Joining us here for this discussion, CNN senior political analyst Gloria Borger and the editor of "Human Events," Terry Jeffrey. Also with me out in the country, Democratic strategist James Carville. He's in New Orleans today. CNN senior political analyst David Gergen is in Boston. You see these gentlemen over here.

Let's start with this debate about the stimulus in Washington. Ali just gave you the numbers and they are depressing. I was in Illinois this week when Caterpillar laid off thousands of workers and I can tell you the pain of the families is palpable and distressing. The big debate here in Washington, what should we do about? Two guests on this program earlier this morning both Democrats, made clear that the way this bill is now structured to them they see it as full of candy, Christmas tree and pork.

Let's listen to Senator Ben Nelson and Governor Jennifer Granholm.

(BEGIN VIDEO CLIP)

NELSON: Now those are important programs, no doubt about it. But they ought to be part of something else, not part of a job stimulus bill.

GRANHOLM: Let me be very clear. I want to see every dollar put into job creation. If things are in there that are not related to job creation, it should perhaps be another bill.

(END VIDEO CLIP)

KING: James Carville, you're the Democrat in the group at the moment. Did the president or the House Speaker overstep here? Did they put things in this bill that you cannot rightly put in legislation that you call emergency economic recovery legislation?

JAMES CARVILLE, DEMOCRATIC STRATEGIST: Well, the Congress has the power to put what it wants in there. Is the bill going to have substantial changes in the Senate and then when it comes to back to the Commerce Committee in the legislative process? Of course it will. And you know, this is a starting point, as they say. There is -- this is the first quarter of this game, if you will.

But I think the important thing in the House vote was that the fact when none of the Republicans vetted for it, I think it was a signal that they really didn't feel like they wanted to be a part of this process.

Now, in the Senate, I think David will attest to this, it will be quite a bit different when it gets there because they have a different way of doing things. So let's see what happened when it gets to the Senate. But you know it's going to change a great deal.

KING: David, a different way of doing things. But if you have a Democrat like Ben Nelson working with the Republican like Susan Collins, the middle doesn't like this bill. James just criticized the Republicans so the right in the House didn't like it. The middle in the Senate doesn't like it. Where are we going?

DAVID GERGEN, CNN SR. POLITICAL ANALYST: I think they're going to produce a very different bill. I think James is right. The first thing they're going to do in the Senate is to scrub this bill of some of the more controversial items that are seen as pork, as candy, as you just said.

I think the harder question is whether they're going to postpone some of the policy decisions, as Alice Rivlin has argued. Just put the money in the stimulus, let's hold on things like changing Medicaid and insurance rules and that sort of thing.

I imagine they will let that stay in there. They will scrub it. They're going to keep it under $900 billion. That's the lid that -- the limit the White House would like to see, they'll abide by that. But they're hoping to come out of the Senate with a bill they can send to conference. And they will get a bill they can send to conference and it will come out of conference, eventually getting six to eight votes in the Senate ultimately and maybe 20 or so in the House. That's their hope.

But I can't emphasize enough that if I just have one more second, John, that the senators are wary of these big emergency things. They did two bills last year that did not work, one they did a tax relief bill under President Bush that did not work and then they did a TARP bill, a bail out of the banks and they felt like that did not work. So they're wary of these fast, rapid emergency answers to things.

KING: So I want you to come in Gloria, but in the context of this president, ran say he wasn't going to play the old game rule of Washington. Washington does these crazy things. They load up bills like a Christmas tree, he said before he took office, and yet this is what we see before us at the moment. It may change, as James and David just said. But how did we get here? And does the president share blame for that?

GLORIA BORGER, CNN SR. POLITICAL ANALYST: He does. And what you're seeing in the House is eight year of pent up demand to try and get the programs in that they weren't able to get in for last eight years because they had a pay as you go budget.

This is essentially -- they have to make a decision. Is this reinventing government on the sly through the back door if you will, because you have this great opportunity and why not do it while you can? Or is this a true stimulus package? And I think what the Obama folks did is kind of let it get out of control at first and now the Senate is going to have to rein it in. And what that means is that President Obama is going to have to turn to some of his House Democrats and say, N-O.

KING: N-O. Terry Jeffrey, I want your conservative voice in this debate. And as I do so, I want to show our viewers your article on the front page of "Human Events," a conservative weekly newspaper, read very widely by the conservative activist base of the Republican Party and the conservative movement. "For Obama, it's not we the people, but we the government." If that is your take from the right, what should conservatives do at this moment?

TERRY JEFFREY, HUMAN EVENTS: Well, I think they have to force real due diligence on this bill, John. We saw the $700 billion financial industrial bailout, ran through very quickly last fall. There hasn't been as much due diligence on this bill, which actually spends more money.

I think what has to happen is the cabinet secretaries in the Obama administration that are responsible for dispensing this money need to come into the congressional committees and explain clearly where this money's coming from, it's all being borrowed.

Secondly, how it's going to be spent, when it's going to be spent and most importantly, how is this money going to create jobs. CBS said last week, 64 percent of this money is not going to be spend until after September of next year. A lot of that are so called tax cuts. Those tax cuts, many of them in fact, are refundable credits that have been paid out in $500, $1,000 checks to people who didn't pay income taxes in the first place. How is that going to really create jobs in the economic crisis?

KING: CBO, for those of you out in America who don't understand the funny language of Washington, CBO is the Congressional Budget Office. Terry Jeffrey makes the conservative point.

Another person after this bill is Rush Limbaugh on talk radio. And he said this in a "Wall Street Journal" editorial. He's not only on the radio, he writes editorials. And he said this, "As a way to bring the country together, and at the same time determine the most effective way to deal with recessions under the Obama/Limbaugh stimulus plan of 2009, 54 percent of the $900 billion -- that would be $486 billion -- will be spent on infrastructure and pork as defined by Mr. Obama and the Democrats. Forty-six percent, $414 billion, will be directed towards tax cuts as determined by me."

James Carville, Rush Limbaugh obviously sees a business opportunity, conservatives are looking for a voice and he's on talk radio. But does he make a valid point in criticizing the bill?

CARVILLE: Well, first of all, he is the most influential and important Republican in the country right now. And Ii think it would be wise to acknowledge that. He is the daddy, as I say, the daddy of the Republican Party. They're all scared to death of it. I was a little taken aback when he said it should be 54-46 because that was the election returns. I sure remember Rush Limbaugh saying the Democrats ought to get more in 2000 because they actually won the election.

No, he is a talk radio show host and he has ascended to political power that's unseen, unheard of in American politics, and I mean, if you listen to these Republicans in Congress, they're scared of him and they follow him. And he has been very, very, very influential in the Republican Party here.

KING: David, what is the risk to the new president? He did get 53 percent of the vote. And his party picked up seats in Congress, but that does means 47 percent of the American people did not vote for him.

Most of them I think have goodwill, they do not want their economy to keep failing, they don't want their president to fail. Where is the line of overreaching, David?

GERGEN: John, that's a good question. I think it's important to understand while he got 53, 54 percent of the vote, right now he commands far more of the support of the American people than that.

You know, he's up in the 60s or 70s in terms of support. He's the most influential, most trusted figure in America right now. And I think that's what's going to carry this bill to ultimate passage.

But I think what's important for him to do, in all respects, is to -- he has got to retain the moral high ground in effect. And for that, he has got to come up with a good plan in the next 10 days to two weeks to rein in the Wall Street executives on all of this excessive pay, the bonuses, bring more transparency to the whole bank bailout.

And he has got to push, as Gloria said, to scrub this bill. He has got to be the one pushing from behind the scenes to scrub this bill of those things in there which are inane or silly or just represent this pent-up demand but really don't do much for stimulus, and say no to some things.

I don't think he let it get out of control in the House so much as I think he had to get it passed in the House. Now that it has passed the House, I think he really has to be tougher in the process of putting limits on what's in this bill, because there is, even as people who support him are beginning to express a wariness, a hesitation about the contents of the bill, they are hearing more and more about what's not going to work as opposed to what will work.

And he -- by the way, Obama has to get control of the message too.

KING: Let's -- well, I wanted -- you say control of the message, we've talked a bit about the substance of the bill. There's a political debate going on. And remember, this president said he wanted to be bipartisan, he said he wanted to end the permanent campaign. I want to play for you a snip of a radio ad, this one is running in Maine, which has two moderate Republican senators, but there are ads like it running against Republicans across the country.

Let's listen quickly.

(BEGIN VIDEO CLIP)

OBAMA: First job in my administration is to put people back to work and get our economy moving again.

UNIDENTIFIED MALE: Tell senators Collins and Snowe to support the Obama plan for jobs, not the failed policies of the past.

(END VIDEO CLIP)

KING: Do we need this right now? Can we have the debate before we have the ads?

BORGER: I think we need to have the debate. And by the way, it probably doesn't help Barack Obama get Senator Collins or Senator Snowe on board, two people who are eminently gettable for him.

So I don't think it helps the debate and I'm sure the Obama people don't think it helps the debate. But I do believe that the president does need to take charge of the message, as David was saying.

And what he needs to do is get out there and say, I'm listening to you Republicans, I'm not just having you in for meetings, but I'm listening to you. KING: We need to sneak in a break. But Terry Jeffrey, quickly, on this point, all of these organizations that have the money on the left to run these ads, is that a reminder that Barack Obama outspent you guys by tons in the election, that this money is still out there for them?

JEFFREY: Well, Senator Obama did an amazing job raising money. So did the Democrats and the liberals in this last election. I'm sure they're going to bring it to bear on the public policy debate. I have no problem on that.

We're about to spend $819 billion of borrowed money. There should be a vigorous debate, independent groups should get out there and have their say. It should force the politicians to be accountable for what they're going to do with this money.

KING: All right. Much more to discuss here on the STATE OF THE UNION. More from the best political team on television.

Plus, at noon Eastern, I'll speak to two senators who play key roles in next week's battle in the Senate over the stimulus bill. Republican John Ensign, and Democrat Dianne Feinstein. Robert Reich and Steve Forbes will debate the best way to pull the economy out of its fiscal meltdown.

And later, we'll give you a chance to see Barack Obama's first sit-down interview as president, and we'll assess the reaction to it in the Muslim world.

And finally, conservative activist Grover Norquist will get the last word in Sunday talk. STATE OF THE UNION will be back in a moment.

(COMMERCIAL BREAK)

KING: Let's get right back to our discussion with members of the best political team on television. Here with me in the studio, Gloria Borger, our CNN senior analyst; conservative writer Terry Jeffrey; James Carville joins us from New Orleans, I believe; and David Gergen is with us in Boston today.

There's outrage all over the country about bonuses, big bonuses to big Wall Street executives, not so much that they get them every year, but that some are getting them now even though they worked for firms that have received some of that $700 billion in taxpayer- financed bailout money.

One of the things we're going to do on this program every Sunday is to take you around the other Sunday shows to show you the highlights of them, we'd like to say maybe so, you don't even have to watch them.

But let's listen to two -- let's listen to Jon Kyl, he's the number two Republican in the United States Senate, a free market Republican. Let's listen to him talking about bonuses this morning.

(BEGIN VIDEO CLIP FROM "FOX NEWS SUNDAY")

SEN. JON KYL, R-ARIZ.: Nobody supports this -- the kind of bonuses that were given and so on. But I do think we have to be careful that we don't try to create some kind of a devil out of the business community here. We're not going to create new jobs unless we have businesses.

And so let's be careful about suggesting that all business folks are bad and they shouldn't make very much money. The president seemed to suggest that it's wrong for them to make a profit in these days.

Well, businesses won't stay in business, they won't create jobs, they won't hire people, unless they think they can make a profit.

(END VIDEO CLIP)

KING: Gloria, what the president said was, it is shameful that some of these firms that have taxpayer money coming to them are having the big bonuses. It's tee-ball for a politician, especially in a bad economy.

BORGER: Sure, you're inner populist channeling that.

KING: But does the federal government want to get in this debate right now about exactly what -- whether or not a bank...

BORGER: Well, I think the federal government wants to say that so long as we're bailing you out, you cannot use this excuse -- use our money to give your people billions of dollars of bonuses. I think, look, a lot of people in Wall Street are paid by their bonuses, but he's saying you just have to shift the equation.

Maybe we're going to tap it, you know, John Thain said, you know, we don't want to lose these people, we need to have them. And, you know, honestly, they're the ones who got Wall Street in so much trouble. So some of them got lost, well, fine, right?

KING: James, I want you to jump in here, but hold on just one second. Let's listen to the president. Let's listen -- he has the bully pulpit now. Let's listen to just how Barack Obama put this.

(BEGIN VIDEO CLIP)

OBAMA: I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses. That is the height of irresponsibility. It is shameful.

(END VIDEO CLIP)

KING: Shameful, James Carville. What happens now?

CARVILLE: Well, first of all, in addressing what Senator Kyl said, I mean, he must really, like, think we're unbelievably stupid.

The idea that you'd give $20 billion in bonuses to a group of people who ran an entire industry into a ditch... (LAUGHTER)

I mean, this was not a good year for -- 2008 was not a good year.

And to say that, you know, you want the dry cleaners to not make a profit, or that you want the auto mechanic shop to not make a profit is carrying things to, I think, a ludicrous extreme.

I think people are outraged by this, and they're saying, if I'm losing my job -- and you're in Peoria, Illinois; you tell somebody at the Caterpillar plant that they're losing that job, and they're making the best heavy machinery in the world, and the guys in Wall Street are running their banks in the ditch and paying themselves billions of dollars for doing it, I can see the outrage very easily.

KING: That outrage coming from a president with a 70-something percent approval rating, Terry Jeffrey -- what does it do to the political dynamic?

JEFFREY: Well, the president's got a good point, but there's also a danger here. And for a long time, these masters of the universe on Wall Street have had obscene compensation packages.

In the past, it was justified by saying, this is competitive market for the talent. Clearly, they didn't make the money on Wall Street, last year, to justify these kind of bonuses.

On the other hand, a lot of people don't know that this bailout package -- the federal Treasury, Secretary Paulson, forced a lot of these banks to take the federal money. They got this money, and now they want some government control.

There's nothing in the law that says the government ever has to give up ownership in the banks.

So, if we have a president of the United States and a federal executive branch that starts dictating to the banks around this country how they're going to conduct their business, I think we have a real problem.

BORGER: Don't take the money. Don't take the money.

(CROSSTALK)

JEFFREY: Treasury secretary Paulson forced some of these banks to take the money.

KING: Go ahead, David?

GERGEN: Well, John, it was only, what, a few weeks ago that, when the Bush administration was in power and Detroit came to Washington looking for money, the Bush administration and the Republicans on the Hill demanded, as part of that deal, that the automobile workers accept lower wages, that they renegotiate their contracts. And, you know, that was, sort of, the popular view around Washington. Now we've got a situation with people who are, you know, the Wall Street types, and folks are saying, oh, no, no, we can't -- we can't jawbone them on what their income is, even though they're getting money from Washington.

I'm sorry. It works both ways. If what we're going to do to the automobile workers is force them to renegotiate, well, these fellows on Wall Street who have been -- you know, they have produced wonders for this country, but, right now, they have not, and they need money; they need help, and they need to be responsible for it.

(CROSSTALK)

KING: I want to shift gears, here, but jump in, real quick.

JEFFREY: Well, the point is, let's have the government not bail these industries out and not tell them what to do. If we get...

(CROSSTALK)

KING: That train has left the station.

(CROSSTALK)

JEFFREY: ... the government controlling our major industries. We do not want that.

KING: Let's -- let's move on.

(CROSSTALK)

BORGER: ... on Wall Street. How about that?

KING: I'm going to stay away from that.

(LAUGHTER)

I pass on that debate. We'll leave that for another week.

We started reporting on this, I remember, CNN on Friday, about this, Tom Daschle's tax problems. And this one's a doozy. He had to pay $100,000 in back taxes. And it's an easy one to sell to blue- collar Americans struggling.

Some of the income he failed to report is having a car and a chauffeur drive him around. And he did not report that as income on his taxes.

This was a subject of discussion this morning. I want you to listen to conservative Senator Jim DeMint and also another -- I believe, also, Jon Kyl, Republican of Arizona, talking about whether Tom Daschle -- whether his tax problem should be disqualified.

(BEGIN VIDEO CLIP)

SEN. JIM DEMINT, R-S.C.: It's disheartening be obviously. I mean, people are struggling to pay taxes on a very small amount of income. And when he's got this huge amount, you know, I can see now why liberals don't mind if the tax rate goes up, because they're not going to pay it anyway.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

SEN. JON KYL, R-ARIZ.: Well, sure, you have to be troubled by it.

I just have to note, you know, with the problems that now- Secretary Geithner had with his taxes; with these problems with former Senator Daschle; with the problems of Bill Richardson; the number two person brought into the Defense Department, I know that President Obama wanted to have a very ethical administration starting out and so on, but I think he's seeing how hard it is to avoid these kind of problems.

And I just wonder, if President Bush had nominated these people, what folks would be saying about that.

(END VIDEO CLIP)

KING: James Carville, to that point, Barack Obama did promise to do things differently in Washington, have an honest and open, ethical administration.

Do all these things, when you bring them together -- let's assume each of these gentlemen made an honest mistake. When you lump them together, does it create the perception, for the party of the little guy, the blue-collar guy, especially Daschle, in having a car and a chauffeur, he didn't declare income?

CARVILLE: Well, it's not helpful, to be honest about it. And, as you know, I predicted, before the year started, that the Democrats would have -- run into this, because they're human beings.

I think, in Daschle's case, this obviously was not intentional, but it's also embarrassing and not helpful.

But, I mean, yes, these things happen. I would expect that the Republicans would seize on this and make points. I'm sure that, if the shoe was on the other foot, people like myself would seize on it and make points, also.

But I think the important thing here is, is that these things have been acknowledged and the taxes have been paid. And, I'm sure, when he's up for confirmation, he'll have to answer questions about it.

KING: To the perception out there, David, to the people watching, is this the kind of thing that can chip away at those stratospheric ratings?

GERGEN: Absolutely. And I think the tension for the president is that he does need to keep the moral high ground, as I mentioned earlier.

And when you start setting standards and then waiving them or making exceptions, whether for lobbyists or on tax questions, that does -- it does chip away at it.

And I think, in the same week when you're going after people on Wall Street about their ethics, you have be very careful about your own within your administration.

That said, I'm in agony over this because I happen to think that Tom Daschle is a terrific public servant. He's one of the most widely admired men in Washington, and partly for his integrity, partly because of his leadership.

And I think that the Democrats truly believe that, with Tom Daschle at the Department of Health and Human Services, they have the best chance of reforming health care in some 40 or 50 years.

So I think there a lot of people pulling for Tom Daschle to get through this, even as they recognize, as James just said, that it is embarrassing.

KING: We have a shortage of time here, so I want to go around to our four very quickly. Yes or no, will he be confirmed?

I'll start with you, David.

GERGEN: Yes, I think he will be confirmed.

KING: James?

CARVILLE: Yes, I hope so, and I think he will.

KING: Terry?

JEFFREY: Former Senate majority leaders get confirmed by the Senate even when they forget to pay $128,000 in taxes.

BORGER: He'll get confirmed, but it could be a strict party line.

KING: A bit of a rough ride?

Gloria Borger, Terry Jeffrey, James Carville, David Gergen, thank you all for coming in today. A great discussion.

And when we get back, we'll go outside of Washington, outside the Beltway, and talk to some regular folks who have their own ideas on how the government might spend $800 billion.

(COMMERCIAL BREAK)

KING: I'm John King and this is STATE OF THE UNION, here are some stories breaking this Sunday morning. The Senate's second- ranking Republican is speaking out about health secretary nominee Tom Daschle. Senator Jon Kyl says he is troubled by Daschle's failure to pay his taxes on time. But he says it is too early to say whether Daschle's nomination is in trouble.

The ballot counting has begun in Iraq after yesterday's provincial elections. Preliminary results indicate more than half of the country's eligible voters turned out. Official results won't be known for several weeks. No deadly violence was reported despite threats from al Qaeda.

But President Barack Obama gave his first television interview this past week. In a symbolic gesture, he chose the Saudi-owned news channel Al Arabiya to get out his message to the Mideast and to the Muslim world. We'll hear some of what he has to say in our noon hour. That and much, much more ahead on STATE OF THE UNION.

We'll get to our reporters here in Washington in just a few minutes. But first, let's hear what the people of Roanoke, Illinois, think. The dismal economy is just hitting home there, just like it is everywhere. And they're facing it with old-fashioned Midwestern grit and a healthy bit of skepticism for the politicians.

Let me take you to the wall here for a quick look. I was out in Illinois this past week, in the Peoria area we spoke to blue collar workers right out here, mostly, Democrats. But we wanted to move over here. The map is having a bit of a fit today. To Roanoke, it's in Woodford County.

John McCain carried that county in the election. So I sat down for breakfast at a fabulous place, at Doc's Diner, we sat down for breakfast, it is a conservative rural county. Interesting discussion.

(BEGIN VIDEOTAPE)

BOB KNAPP, ROANOKE, ILLINOIS: Well, $800 billion is a lot of money. The way they're spending it, I think, needs to be reshuffled, and in my estimation we need to see some more infrastructure money.

JEREMY KNAPP, ROANOKE ILLINOIS: I have a hard time thinking that we can spend our way out of this problem. I just -- I feel it's going to be a difficult time for us to try and get out of this by spending our way.

MATT LEMAN, ROANOKE, ILLINOIS: I agree to the point of, you know, roads and bridges are all great. I'm more worried about eight years from now when they've got to raise our taxes through the roof to pay for all of this with the bailouts, with the stimulus package. It's all fine and good but it's all a short-term gain. I'm looking for a long-term solution.

KING: So just let the market and the economy...

LEMAN: Let the market do its thing.

KING: ... run its course, don't have the government try to fix it?

DWAYNE STUDER, ROANOKE, ILLINOIS: I feel that this is going to be a long haul. I sound like a pessimist. It's not going to go away over night.

KING: Did anyone at this table vote for Barack Obama?

UNIDENTIFIED MALE: No.

UNIDENTIFIED MALE: No.

KING: Nobody did? And so you all voted for McCain?

UNIDENTIFIED MALE: Yes.

UNIDENTIFIED MALE: Yes.

KING: And we're only in two weeks and counting here, but how you think he's doing? Impressed? What you expected?

B. KNAPP: We've just got to give him a chance. He was elected by the people. Not who I supported, but we'll give him a chance. See what he can do.

KING: Do you trust him with $800 billion?

B. KNAPP: We've got to get this mindset of the American people out of thinking the government is going to save us all. People think we'll do everything and if we run into trouble, then the government will bail us out and that's exactly what's happening now, is everybody thinks the government will take care of them. And it doesn't work that way.

KING: Does it bother you that all of the Republicans in the House voted no on this stimulus plan or does that encourage you that there's somebody there standing up to him?

LEMAN: It encourages me. That's our watchdog system. You know, if you had everybody voting for it, things would go through that shouldn't go through.

KING: If you turn on the radio and listen to Rush Limbaugh and others, but Rush specifically has said in recent days that if Obama is going to be a big government liberal, and if he's going push programs that Rush considering to be socialism or way to the left liberalism, that if that's the case, Rush says, I want him to fail. Do you agree with that?

LEMAN: I don't know that I want him to fail. But if the things that he's doing is bad for the country, then I hope those things fail. I don't necessarily want him as a person to fail.

KING: What do you think of that?

STUDER: I agree with Matt 100 percent.

KING: But do you want the president to fail?

STUDER: No. No, we can't afford to have the president fail.

(END VIDEOTAPE)

KING: Great group, great breakfast at Doc's Diner. In the end, the people there say they're going to give the new president some time, as you just heard, some time, not a long time.

Straight ahead, three of the best political team on television are standing by to go through today's political maneuvering.

And later, after everyone else talks of bailouts, stimulus plans, anti-tax crusader Grover Norquist right here gets the last word.

(COMMERCIAL BREAK)

KING: Former Senator Tom Daschle's tax problems were spread across the morning newspapers and the talk shows this morning. Let's discuss it now. I'm joined by three correspondents who have been working on breaking more of this story since Friday: senior White House correspondent Ed Henry, CNN's national political correspondent Jessica Yellin; and senior congressional correspondent Dana Bash.

Let me start with you on Capitol Hill. You were there when all of this unfolded Friday. Senate Finance Committee looking at material that he didn't pay -- had to pay $100,000-plus in back taxes in part for something that's tee ball for politicians and talk radio, he had a car, he had a chauffeur, he did not declare it as income.

Is this going to derail the nomination to be health secretary?

DANA BASH, CNN SR. CONGRESSIONAL CORRESPONDENT: It's going to be interesting to watch and to see the answer to that question. And here's why, because not only is this the big issue, and this is the second time we've had this issue, as you've been discussing in the Obama cabinet, but Tom Daschle was not only a member of the Senate club, he was the head of the club.

He was the leader of the Democrats for 10 years in the minority and the majority. So it is interesting to see how they treat him and whether they treat him differently. The other subplot that's going on here, is because he knows these senators so well who are looking at his confirmation, he does not have a great relationship with the head -- with the Democratic head of the Finance Committee, Max Baucus.

So that is something that is also going on beneath the surface, that these two butted head when they worked together and people who are close to Daschle feel like they're not -- that he's not getting a fair shake from the committee for that reason.

KING: Ed Henry, do they understand at the White House that on Tim Geithner, he is the treasury secretary, he heads the IRS, he had to pay back taxes, now Tom Daschle, he is a cabinet secretary, is going to have an office in the White House, he has to pay back taxes, that they are asking their Democrats to expend political capital defending these guys when they need them on huge policy issues down the road?

Have they calculated that over at the White House? ED HENRY, CNN NATIONAL POLITICAL CORRESPONDENT: They have. And they are very worried about the fact that not just Republicans opposed Tim Geithner, he won in the end. But you'll remember Democrats like Robert Byrd said, I cannot in good conscience support Tim Geithner because he did not pay his taxes.

What is Robert Byrd, who is really tight with Tom Daschle going to say now? And I think Dana is absolutely right. If Tom Daschle were not a former senator, we would not even be having -- it would be done. It would be over.

HENRY: But he does have deep relationships up there and I think it should be noted as well, we've covered him a long time. He has a lot of integrity. This is a very odd situation. Having covered him a long time, he was always known for integrity. This is a bizarre situation. Maybe it was an honest mistake. But politically, the White House, this is a bad, bad situation for them.

YELLIN: I have to say I find this really surprising he's in this situation. I had a situation similar once where I had to take a car to work, I worked an overnight shift and my company required it. It was in an unsafe place and they required me to pay taxes on that car. And I said it was absurd you're making me do this and they said this isn't our decision, it's the law. Anybody who takes the car regularly knows they have to pay taxes on it.

KING: But he was on the finance committee when he was in the Senate. We would hope he knows the tax laws. And Jessica, let me stick with you for a minute. You covered Obama, you traveled the country with him during the campaign. He was going to change the way Washington does business. It was going to be new and different. Does this round counter, let's concede people make mistakes. But to have two of these, Richardson had to step away from the commerce secretary job. At some point politically does it chip way from the image he needs?

YELLIN: Yes, yes, emphatically yes. How can you forgive somebody for not paying more that $100,000 in taxes when that's more than the average American, three times what the average American makes in a year? It's political capital that Obama loses, the more he allows this.

KING: Want to move on to what is becoming an even more fascinating drama as this stage goes on. Ed, tomorrow at the White House, you might see Judd Gregg. He's a conservative from New Hampshire, he's a Republican. His father was once the governor of New Hampshire. He may join the Obama cabinet we are told as commerce secretary. Where you work, that's a big deal. If you remove a Republican, a Democratic governor in New Hampshire makes that pick, could change further the balance of power. But the plot thickens. Listen to Mitch McConnell, the Senate Republican leader speaking this morning on CBS "Face the Nation." Apparently there's a deal here.

(BEGIN VIDEO CLIP)

MCCONNELL: Senator Gregg told me that if he were to take this appointment it would not alter the makeup of the Senate in terms of the majority, minority.

(END VIDEO CLIP)

KING: Not alter the makeup. Therefore, the Democratic governor, does Judd Gregg go to the Democratic governor and say, if I take this job, you must name a Republican?

BASH: It certainly seems that way. And it's not a surprise. Speaking to Republicans in New Hampshire at the end of the week when this was became real, it was possible this would happen, I was told by a number of people that Judd Gregg is actually pretty close with the Democratic governor of New Hampshire.

And actually, remember, this is a Democratic governor who has campaigned with Republicans, he campaigned with John McCain. He was I think the last to actually endorse Barack Obama and it's an independent state in New Hampshire. So it would be very hard to believe that Judd Gregg, a real Republican and a true blue Republican, would take this job in a Democratic cabinet without getting a promise beforehand not to alter the balance of power in the Senate.

KING: And what is the calculation Ed at the White House? What do they think they get by bringing in a pretty high powered Republican?

HENRY: Well, beyond the politics, whether it changes the makeup of the Senate, the president we're told does trust advice from Judd Gregg. He's somebody who is very much a fiscal hawk, really wants to turn around the budget deficit and has been talking for months now about bringing more accountability to the TARP program, that bailout from last fall.

And this is all happening as we're learning that the president in about a week and a half is going to roll out a whole new financial rescue plan. Separate from the stimulus plan that will deal with foreclosures, it will deal with trying to crack down on these bonuses and executive compensation.

So, while that's being put together at the Treasury Department, if Judd Gregg comes on, he's been someone as a bipartisan figure across the aisle has been saying something like this is needed and he could help sell it on Capitol Hill to Republicans.

KING: Quick time-out here, we'll be back with more politics in just a moment. But first, does this guy look relaxed or what? Look closely, that's Wednesday night, former President George W. Bush strolled out to catch a Baylor University Lady Bears home game. Well, we've still got some work to do. He's relaxing at basketball. We'll be right back.

(COMMERCIAL BREAK)

KING: Joining us now to help with our math skills and a fiscal reality check, chief business correspondent Ali Velshi. And still with me here in Washington, Ed Henry, Jessica Yellin and Dana Bash. I want to show this front page of "Newsday." We like the Sunday newspapers here on STATE OF THE UNION. "The $819 billion questions. Who will control the money? And what will it fix?"

Two senators on this program this morning, Senator Collins, a Republican, Senator Nelson a Democrat, says the president has it wrong, the House Democrats have it wrong, they want to fix this plan. By the time it comes for a vote in the Senate, how will it be different?

BASH: It looks like it's got to be at least a little bit different for it to pass at this point. There was a strategy session inside the Senate majority leader's office on Thursday night. Rahm Emanuel at the White House, Larry Summers at the White House were there, and they made a decision. They had a discussion. Do we make this a bipartisan approach and make some compromise now or let it play out on the floor this coming week?

They decided to let it play out on the floor. However, I just got off the phone with a leadership aide on the Democratic side who said we get that we do have to add infrastructure spending and there will be an amendment very soon, to add about $20 billion on that. But that obviously is not the big issue. The big issue as you heard from the senators is all of the other stuff that they think just won't stimulate the economy and create jobs. That stuff, I think has got to come out for a lot of these senators, these centrist senators, to vote for it.

KING: You say it has to come out. Jessica, I want your views on the politics of this. But first, let's listen, Jon Kyl, the number two Republican in the Senate and then Dick Durbin, the number two Democrat, Senator Durbin's answer alludes to what you just talked about. Let's listen.

(BEGIN VIDEO CLIP)

KYL: There are so many different things that you can make fun of in this bill. Let me just mention one. Millions of dollars to World War II Filipino veterans in the Philippines. Now that may be a good thing to spend money on, but not in a stimulus bill. It doesn't stimulate anything.

DURBIN: We're very open to this. For instance, some of the Republicans have been saying to us, put more money in infrastructure, invest in the roads and highways and bridges. Make sure that we create good-paying jobs here in America that we can see, whether we're dealing with mass transit or local infrastructure or waste water treatment. You're going to see an amendment that does exactly that.

(END VIDEO CLIP)

KING: So Jessica Yellin, every Republican voted no in the House. Is just adding infrastructure money enough to get Republicans to vote yes in the Senate? Or are they going to have to strip out some of these things, maybe including the aid to the Filipino World War II veterans? YELLIN: They are going to have to strip out a lot more of the extra spending and maybe add a little bit of some tax benefits for businesses. The problem is right now Obama and the Democrats are losing on the politics of this. Even though America says they're behind the stimulus, over time it doesn't sound good with all of these extras. They can defend the policy if you get into it, but it's in the weeds. They need to make some changes for this to really sell in a bipartisan way, especially six months down the road once we see how it it's working.

KING: So Ali, when you watch this from -- we're the Washington guys, you have the political debate here. From a policy standpoint, when you look at the economy, what in this bill actually will create jobs months, two, three down the road? And what in this has nothing to do with it?

VELSHI: In the short term, nothing. What this is about is about confidence. There is no economy in the world that so depends on consumer confidence and consumer spending as the U.S. economy.

VELSHI: Now we started a measure of consumer confidence back in 1985. And because it started that year, whatever consumer confidence was that year was counted as 100. That's our baseline. We're now at 37, that is the lowest it has ever been. If consumers don't believe the economy is getting better, they will continue to not spend and jobs will not be created.

You might create jobs because you're actually building stuff and infrastructure. But ultimately, we're not getting the economy back on track. So what this administration needs to do is take a lesson from something we all covered at the -- in the second half of 2008 and that was the disaster of how TARP was sold to the American people.

He doesn't need Republican support. What the president needs is American people to be behind this and say, I get how this is going to solve the problem. Republicans will get on if we all think there is an answer to this whole thing.

What we don't know is how exactly does this create jobs? That is the number one problem that has to be solved.

KING: We learned in the campaign, Ed, how quick this president can be to fix a mistake that he makes. That was a trademark during the campaign. Do they think they made a mistake letting the House Democrats write the first bill, or did they think they had to do that?

HENRY: They feel that they had to do it. That that's where the process starts. That they're sort of stuck with that. And to Jessica's point, for the politics of this, they say, look, is this a perfect bill? No. Of course not. This is the way the sausage is made.

But they think actually that they can turn this around on the Republicans because they continue to make the changes Dana is talking about and no Senate Republicans come onboard. And you add to that no House republicans onboard.

People in the country are hurting. And while it's not a perfect bill, if you continue to vote against nothing at all, that can blow up in the Republicans' face.

KING: Let's shift to bonuses. Tee ball here in Washington, especially word that there are big bonuses where that guy Velshi works every year up in New York. But some these firms paid out these big bonuses. They've also received some of the TARP money, that taxpayer bailout money that we've talked about.

The president says it is shameful. One of the chief allies in Congress, Claire McCaskill, says these are idiots doing this with taxpayer money. I want you to listen to Barney Frank. He's the chairman on the House side of the Banking Committee, the Financial Committee. And he seems to think -- the language is a little funny. But he seems to think we might have to live with this.

(BEGIN VIDEO CLIP FROM "THIS WEEK WITH GEORGE STEPHANOPOULOS")

FRANK: It's called collateral benefit. We need to restore the credit system or talked about this. The only way -- but you can't create a whole new banking system de novo. So the only way can you help the banking system get back into credit is do some things that will probably provide some collateral benefit to people people don't like.

(END VIDEO CLIP)

KING: Collateral benefit, Ali, to people people don't like. I assume that means bankers get big bonuses.

VELSHI: Yes, but you know what, it's the same reason -- same argument we had when people said, we don't want to provide stimulus to the auto industry because they messed it up for us. The they you have to distinguish, between the people at the top who actually might have contributed to messing it up, and everybody else who is a working stiff in the organization.

And while Americans may not believe all of this, there are a lot of working stiffs in the banking industry, 250,000 of whom lost their jobs in 2008, another 150,000 in 2007. It's a big industry. And there are a lot of people who were doing nothing wrong in it.

Their structure -- their bonus structure, the way they get paid, the way we get paid is there is generally a number. The way they get paid is that half or more of it is bonus. So it's bad P.R. all around. And the fact that the top guns were getting the kind of money that they're getting and get bonuses, I think that's what gets under people's collars.

KING: I want to close with the moment. We're talking a lot of policy and a lot of politics. We're still two weeks into the Obama administration. He's the first African-American president. He went to this dinner last night, the Alfalfa Club.

At one point didn't even allow women, let alone African- Americans. Here's what he said last night, Barack Obama said: "I know that many of you are aware this dinner began almost 100 years ago as a way to celebrate the birthday of General Robert E. Lee. If he were here with us to tonight, the general would be 202 years old and very confused."

(LAUGHTER)

KING: We have -- we are reminded there's a lot to do. But we're still going through this amazing change. There you have an African- American president standing up and making jokes at a dinner founded in honor of a Confederate general.

HENRY: Absolutely. And Robert Gibbs had a joke on Friday where he basically said nothing says change like the Alfalfa Club.

(LAUGHTER)

HENRY: Because that is another part of this. Sure, there is a lot of change going on, but as we were talking about, the lobbyists are coming into the administration, the tax problems, this administration also going through how you balance working with official Washington and trying to shake it up. And it's a careful balance.

KING: All right. On that careful balance, we need to go today. Dana Bash, Jessica Yellin, Ed Henry, Ali Velshi, thanks for making the trip down.

Still another hour to go. That's right. Another hour to go. Hang right there. A lot you really don't want to miss. Senators Dianne Feinstein and John Ensign will give us the latest on the stimulus plan. Economic analyst Steve Forbes and Robert Reich will debate the best way to kick-start the economy.

But straight ahead, I will talk to a man who knows firsthand about cutbacks and layoffs. STATE OF THE UNION will be right back.

(COMMERCIAL BREAK)

KING: I spent some time this week in Peoria, Illinois. Caterpillar announcing it will lay off thousands of workers. I want you to listen to Jim Lierle, union seniority will keep him working. He has been there 39 years. But he feels the pain of his allies.

(BEGIN VIDEOTAPE)

JIM LIERLE, CATERPILLAR EMPLOYEE: It's sad. I really -- my heart goes out to the people. I tell you, I wouldn't want to be on a layoff. I'm very lucky. I was here before I went into the Army. I had seniority. I've never been laid off.

KING: Do you see it as the end of a line or end of a tradition?

LIERLE: I made a good living here. But the kids today aren't going to make a living that I made. They're not going to do it. And I don't know how it's going to work because the price of everything keeps going up and nobody's wages go up.

KING: Do you think the politicians in Washington, including a new president, can do anything about it? Or is the economy something that runs in its own cycles?

LIERLE: I'm going to give the man the benefit of the doubt and see what he comes up with. I respect the rank. But a man has to earn respect. You just don't give him respect. He has got to earn it. And he has got a heck of a job ahead of him, because this country is in trouble.

KING: It's his economy now.

LIERLE: That's exactly right. He inherited the mess. And I wouldn't want the job.

KING: If you look around this room, so many of these will be sent overseas.

LIERLE: Yes, sir.

KING: While it sounds good and patriotic, is "buy American" a good idea for a company like Caterpillar?

LIERLE: Half the tractors we build here go overseas. And I don't want to see any of them jobs leave. And if they start to try to put tariffs on us where we can't export them, we're worldwide, we have got to have that world market. We've got to have it. Fifty percent of these tractors are going to go overseas. We can't lose that. If we lose that, we're going to go down.

KING: Do you trust the politicians to understand that?

LIERLE: Oh, no, sir. Like I told you, I respect the rank. But the man has to earn respect from me. I don't give respect. They've got to earn it. And so far I haven't seen a whole lot that anybody has earned.

KING: The president is from here. Do you think he understands this place?

LIERLE: I don't know. I'm not going to judge the man yet. I want to see what he does. I'll give him the benefit of the doubt. See what he comes up with. The way he's talking, he has made a lot of promises that's going to be hard to fulfill all of them promises. And he's sure not going to do it in the first six months.

KING: But how patient are you?

LIERLE: I've got a lot of patience. I've been married 38 years, I've got a lot of patience.